Housing Improvement Expenditures that Provide Community Benefit
Background
As set forth in Revenue Ruling 69-545, one of the requirements that a hospital must meet in order to qualify as tax-exempt is “to be organized and operated exclusively in furtherance of some purpose considered charitable.” In an effort to provide information regarding the activities, policies and community benefit provided by tax-exempt hospitals when filing the Form 990, Return of Organization Exempt From Income Tax, the hospitals are required to complete Schedule H, Hospitals.
Community Benefit and Community Building Defined
Community benefit expenses, as defined by the IRS, and the resulting community benefit percentage are reported in the Form 990 Schedule H, Part I, Line 7, Financial Assistance and Certain Other Community Benefits at Cost. The instructions for Schedule H describe community benefit activities or programs as those addressing an established need that “seek to achieve a community benefit objective, including improving access to health services, enhancing public health, advancing increased general knowledge, and relief of a government burden to improve health.” A tax-exempt hospital’s community benefit percentage is often used as one of the key indicators of its charitable activity.
In addition to reporting the costs of community benefit activities, tax-exempt hospitals report the expenses associated with any community building activities. Community building activities are reported in Schedule H, Part II and accordingly are not taken into account when calculating the total community benefit provided by the tax-exempt hospital.
Community building activities are described in the Schedule H instructions “as costs associated with protecting or improving the community’s health or safety”. Community building activities include such items as physical improvements and housing, economic development and community support.
Housing Improvement Expenditures as Community Benefit
Currently, the Schedule H instructions include physical improvements and housing in Schedule H, Part II, but state that “some community building activities may also meet the definition of community benefit.” The Instructions for Schedule H describe community benefit activities or programs as those addressing an established need that “seek to achieve a community benefit objective, including improving access to health services, enhancing public health, advancing increased general knowledge, and relief of a government burden to improve health”. For expenditures to be reported in Schedule H, Part I, there must be an established community need for the activity or program. The IRS Schedule H instructions state that community need may be demonstrated through a Community Health Needs Assessment conducted or accessed by the organization or other documentation that demonstrates community need. Additionally, the Instructions state “Do not report in Part II community building costs that are reported on Part I, line 7 as community benefit.”
Conclusion
While the IRS has provided informal guidance with respect to certain reporting of community building activities as community benefit, it is recommended that tax-exempt hospitals that make the determination to report housing improvement expenditures as community benefit maintain very detailed records supporting the decision. Specifically, the documentation should include which community need is being addressed through this specific expenditure.
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
